Life insurance

We'll consider two main issues - how much cover you will need, and what it will cost.

The idea of life insurance is that if you die sooner than you'd like to - most people do, funnily enough - your dependants will not struggle financially.

Plans are available that combine life insurance and investments (whole of life cover). Commissions for salespeople and charges made by investment companies can be relatively high. You can almost certainly find more efficient savings vehicles. It's usually best to keep insurance and investments separate from one another.


How much insurance do I need?
There are many different ways of figuring this out. My preference is simply to write down my current annual income. Then I write down how many years my wife and children will need that income for if I were to die tomorrow. I multiply these numbers together to find how much I need to insure my life for.

Using an annuities spreadsheet, and making the assumption that my wife will be capable of investing a lump sum for a real return (after tax and inflation) of 2.5 %, I get the following table:


Lump sum I need to be insured for:

My dependants need an annual income of	For 10 years	For 15 years	For 20 years	For 25 years	For 30 years	For 35 years	For 40 years	For 50 years
$20,000	$179,417	$253,818	$319,578	$377,700	$429,071	$474,476	$514,607	$581,427
$25,000	$224,272	$317,273	$399,472	$472,125	$536,339	$593,095	$643,259	$726,784
$30,000	$269,126	$380,727	$479,367	$566,550	$643,606	$711,714	$771,910	$872,141
$30,000	$269,126	$380,727	$479,367	$566,550	$643,606	$711,714	$771,910	$872,141
$35,000	$313,980	$444,182	$559,261	$660,975	$750,874	$830,333	$900,562	$1,017,498
$40,000	$358,835	$507,636	$639,156	$755,399	$858,142	$948,951	$1,029,214	$1,162,855
$50,000	$448,543	$634,546	$798,945	$944,249	$1,072,677	$1,186,189	$1,286,517	$1,453,568
$60,000	$538,252	$761,455	$958,733	$1,133,099	$1,287,213	$1,543,821	$1,744,282	$1,900,882

My current income is $60,000 and my youngest child is 4 years old. We have a mortgage of $100,000 and no other loans. It would be ideal, therefore, to insure my life for a lump sum to provide $60,000 p.a. for 15 years. The table tells me that I need life cover worth $761,455.

Will my wife really need $60,000 pa for 15 years? Probably not. She has qualifications and once our youngest is at school, she can return to the workforce. As a single-parent, it's probably best she doesn't work full-time. A part-time job would still bring in a decent income.

So I could probably afford to reduce the cover to produce an annual income of $40,000 for 15 years. That's just over $500,000 I'll need to cover for.

Hmm - what about that mortgage? It would be nice if that could be paid off. Okay, I'll insure my life for $600,000.

To be honest, this still looks like a very generous sum and is probably more than is needed but my personal nature is very conservative. If I die early, I'd like my wife and children to be comfortable financially.

There are other ways of doing the calculation - some advisors reckon that if you multiply your current annual income by five or six, you're doing as much as you need to.

Armed with the table above, you can decide for yourself the amount of insurance you will need.


How much will my life insurance cost?

Insurance companies use actuarial tables to figure out how likely you are to die while your life is covered. If you're already advanced in years, your probability of death is higher than average and your premiums will be more expensive. Similarly if you smoke, you're more likely to die than average, so you'll pay higher premiums.